THE FUTURE - Vector Limited · generation, new capabilities of technology and the ever-changing...

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VECTOR:// THE FUTURE IR 2019 ELECTRIFYING IS

Transcript of THE FUTURE - Vector Limited · generation, new capabilities of technology and the ever-changing...

Page 1: THE FUTURE - Vector Limited · generation, new capabilities of technology and the ever-changing preferences of customers. We must empower customers to control where and when they

VECTOR://

THE FUTURE

IR 2019

ELECTRIFYING

IS

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Consumers are choosing how they use energy. At work, at play.

They are embracing more choice over how they get around, e-scooters, e-skateboards, e-bikes, electric vehicles (EVs),

electric trains. You name it, choice is constantly accelerating.

The way we move around is electrifying right before our eyes.

WE’RE

GOING

ELECTRIC

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BUT THE CLIMATE

IS ALSO

CHANGING

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The electrification of transport is another significant example of an energy transition, driven by consumer preference and

by the urgent need to decarbonise our economy and minimise the growing impact of climate change on New Zealand.

It means New Zealand must find a less carbon-intensive energy supply. It means consumers will insist on having

more control and choice. It means long-term city and energy infrastructure planning must become more integrated.

And it means new technologies and new market entrants will arrive, keen to disrupt the status quo on behalf of consumers by putting more power in their hands, just as they have done

in other industries.

Change is already happening. The number of EVs has been roughly doubling every year. By June 2040, the Ministry of

Transport estimates EVs will make up 40% of New Zealand’s fleet. Now add in e-scooters, e-bikes, e-skateboards, and

whatever the future will bring.

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The cost of grid-scale battery storage is tumbling. Energy Storage Association (ESA) figures show costs for large-scale

storage systems have halved between 2014 and 2018.

As part of its innovative thinking, Vector is trialling vehicle-to-home technology which turns EVs into mobile batteries.

Meanwhile, according to the International Renewable Energy Agency, in some Middle-East countries we can now see solar

photo-voltaic prices of below 3 cents (USD) per kilowatt hour. This is cheaper than all other forms of electricity

generation.

These sorts of trends mean that customers should be able to look forward to more sustainable homes and energy

independence, through solar and battery, through energy control software and technologies, and through investment in efficiency measures like LED lights and better insulation.

BATTERIES

ARE NOW

INCLUDED

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As a diversified energy group and a leader in new energy solutions, as well as the custodians of the country’s largest energy distribution

platform that underpins this, our job is to enable the transition to a new energy future to meet the needs of future generations,

whilst growing sustainably.

Our network must become even smarter, to cope with new types of generation, new capabilities of technology and the ever-changing preferences of customers. We must empower customers to control where and when they charge their e-scooter, their e-bike or their

EV. We must keep everyone connected as stronger and more unpredictable weather challenges New Zealand’s infrastructure.

We must support the relentless growth of Auckland city.

The wider sector must become more responsive to all these forces also. As a country, we cannot continue to import coal to plug gaps

between supply and demand. We cannot continue to remain so dependent on hydro storage when drought risk is increased

by climate change.

It’s time for bolder action, on all sides. The pending Interim Climate Change Commission report will help guide how New Zealand can make the transition to 100% renewable energy, while the current Government electricity sector review is a huge opportunity to put

the right incentives in place to reshape the industry for the benefit of consumers and to set new rules for new times.

IT’S TIME

FOR

NEW RULES

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VECTOR

IS TAKING

THE LEAD

Disruption doesn’t wait. It starts gradually then arrives suddenly.

An energy revolution is fast growing, and is being driven by what consumers want and what technology can deliver, not by what the

industry or regulation is willing to allow.

While the collective sector must work harder to provide less carbon intensive supply, we know that changing consumer preferences and the ongoing growth of Auckland will also

continue to drive demand. Vector must be in a position to handle this disruption, so for some time we have been forming global relationships with leading companies, and taking a leadership position on new technologies, new customer solutions and new

ways of thinking about delivering an intelligent, resilient network.

Change has consequences. Whenever there is major disruption, there are some who may be more impacted than others. So, we

have also been working with consumers to understand how these new energy technologies will evolve and be used. We must strive to help share the load. Failing to do so would leave some people

behind, and would hold Auckland back.

The future of energy is here, let’s make it work for all New Zealanders.

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PERFORMANCE HIGHLIGHTS

Interim dividend

CENTS PER SHARE8.25

FINANCIAL HIGHLIGHTS

HALF YEAR

Group net profit increases 5.4%

Net profit

$83.3M

Adjusted EBITDA increases 5.9%1

Adjusted EBITDA

$264.7M

Regulated Networks adjusted EBITDA

Up 3.1%1

$198.7M

Fully imputed Up 12.5%1

Gas Trading adjusted EBITDA

$20.7M

Up 12.7%1

Technology adjusted EBITDA

$72.9M

Capex increases 10.1%

Capital expenditure

$201.1M

New electricity connections

Network connections

5,160

SNAPSHOT

New gas connections

1,6691. Includes NZ IFRS 15 and 16 accounting changes.

See page 21 for more details.

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PERFORMANCE HIGHLIGHTS

Safety Always:

TRIFR decreased by 17%

LTIFR decreased by 59%

BUSINESS HIGHLIGHTS

Vector Urban Forest launched in September 2018, planting more than 15,000 trees

On 31 December 2018, Vector Lights lit up the first major city in the world to welcome in the new year

Commissioned new grid-scale batteries in Warkworth and Snells Beach

Continued smart meter growth in New Zealand and Australia

First New Zealand business to receive the Accessibility Tick

Deloitte Energy Excellence Award achieved for Health & Safety at OnGas Bottle Swap plant

New Outage Centre now in operation, supported by new Cyber Security Operations Centre

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LEADERSHIPChair and Group Chief Executive report

CONTINUED PROGRESS

ENERGY FUTURE

TOWARDS A NEW

Simon Mackenzie— GROUP CHIEF EXECUTIVE

Dame Alison Paterson— CHAIR

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LEADERSHIPChair and Group Chief Executive report

Vector’s financial results for the six-months to 31 December 2018 demonstrated growth across all business segments within the Group, with much of this growth fuelled by the continued expansion of Auckland’s city and population.

The six-month period also saw ongoing change as the macro trends that Vector has long been anticipating, and in many cases leading, continued to play out. This is within an industry that, historically, has been slow to adapt to change and has significant vested interests and legacy assets to protect. Vector has stood apart from others and has been working hard to stay ahead of the curve and lead. As a result, we have been thinking about and investing in customer choice and new technology and associated trends in the energy sector for over a decade now.

The electricity and transport sectors are rapidly converging. Not only does New Zealand have more electric vehicles (EVs) on our roads by the day, but also the popularity of e-bikes is booming, and we have even seen the mass introduction of e-scooters in several cities as a further sign of potential transport disruption to come. To support the expected growth in EVs, Vector has released a how-to guide to make it easier for tenants and residents of business, commercial and apartment buildings. Vector’s ‘Connecting Electric Vehicle Chargers’ guide offers best-practice advice for installing EV chargers – including making sure that chargers are compatible with a wide range of EVs now and into the future.

The showcasing of the possibilities of new and sustainable technology is important. This was one of the main reasons why Vector, in partnership with Auckland Council, delivered Vector Lights on Auckland Harbour Bridge to the city. It was pleasing to see international media coverage of Auckland’s New Year’s Eve celebration with Vector Lights providing a brilliant visual back-drop to the first major city in the world to welcome in 2019.

The energy and transport sectors are rapidly converging.

LE

AD

ER

SH

IP //

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LEADERSHIPChair and Group Chief Executive report

Through the internet of things, cities and infrastructure networks are becoming smarter and more connected to each other and to distributed devices and objects. More of this digital and infrastructure ‘intelligence’ will be needed to help manage the challenges of the volatile and unpredictable weather that climate change is now creating. This is one of the reasons why Vector has been investing in the co-development of an intelligent utility networking system of systems, known as DERMS (Distributed Energy Resource Management System), to help manage and optimise the inevitable growth in solar, battery, EVs and other distributed energy sources and network connected devices.

Auckland continues to grow relentlessly. Meanwhile new digital and energy technologies are disrupting sector economics and offering viable alternatives to the old-fashioned 40-year infrastructure assets that in previous decades would have been needed to accommodate Auckland’s rapid growth. This will help reduce the potential burden on future generations created by unnecessary costs or obsolescent infrastructure.

And, most importantly, consumers are demanding more empowerment over how, where and when they use energy, and have ever-higher expectations around the service they receive and the contributions that companies make to critical issues. Vector has been taking the lead on sustainability for many years because it’s the right thing to do, because

it is becoming more and more urgent to address, and because increasingly, our customers expect us to. We also believe leadership in sustainability is good for business, providing us with better visibility of the potential role of the new and more sustainable energy technologies in driving commercial benefit and material value.

These are the macro trends that have underpinned our strategic thinking around diversification and investment, and these are the trends that contributed to our solid financial results for the six months to 31 December 2018.

Looking at the half-year 2019 financials, adjusted earnings before interest, tax, depreciation and amortisation (Adjusted EBITDA) for the six months to 31 December 2018 were $264.7 million, up $14.7 million (5.9%) on last year’s result.

The headline adjusted EBITDA result includes an uplift due to certain accounting changes1. Excluding these accounting changes, comparable adjusted EBITDA was up $10.0 million (4.0%) on the previous corresponding period.

Each business segment recorded an uplift in adjusted EBITDA relative to the prior period. Regulated business earnings were up $6.0 million (3.1%) largely due to higher electricity volumes because of continued Auckland residential growth and a colder winter compared with the last year. Gas Trading earnings were up $2.3 million (12.5%) as a result of higher production levels at the Kapuni gas treatment plant and cost efficiencies from the new Bottle Swap plant in South Auckland.

Earnings in the Technology segment grew $8.2 million, or 12.7%, mainly because of continued growth in smart meter deployments in New Zealand and Australia. Within this segment, E-Co Group has experienced some market and operational headwinds, and as a result has underperformed against our expectations. To address this, a new CEO and new management team have been recruited,

1. As at 1 July 2018, Vector has adopted new standards for revenue from contracts and lease accounting (NZ IFRS 15, 16) and changed the way in which we account for gains/losses on disposal of fixed assets. For more information, and a breakdown of NZ IFRS changes by segment see page 21.

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LEADERSHIPChair and Group Chief Executive report

who have been repositioning the business to meet the growing demand for heating, ventilation and air-conditioning solutions.

Group net profit was up 5.4% to $83.3 million from $79.0 million in the prior period. This was largely due to higher earnings and an increase in capital contributions, partially offset by an increase in depreciation and amortisation as well as non-cash movements within costs of finance.

Capital expenditure increased 10.1% to $201.1 million from $182.7 million in the prior period. This was driven by an increase in Australian smart meter deployment and network capital expenditure to support the ongoing growth in Auckland.

As mentioned at the annual shareholder meeting in November 2018, since the major storm in April 2018, Vector has been upgrading the foundations of its outage management systems, processes and tools to improve the customer experience. In addition, we have been working closely with retailers and other key stakeholders, such as Civil Defence, to improve essential information access and data coordination. We have also increased our vegetation management efforts, and have continued to upgrade and maintain our existing network assets.

While this programme of work has (thankfully) yet to be tested with a weather event of similar magnitude to the one experienced in April last year, the painful lessons we have learnt have also seen a comprehensive overhaul of the underlying systems and processes that feed into customer tools. A new and improved Outage Centre customer tool is now in operation, supported by a new Cyber Security Operations Centre, and we expect to see continuous improvements to the way in which our customers can access information during outages.

That said, as an organisation that is increasingly focused on customer experience across our entire Group, we know we still have a great

deal of work to do. Further, we see customer experience as an increasingly critical part of our investment thinking, and have developed deeper insights into what customers prefer and expect, and how they want to be able to engage with us across our products and services. We welcome the focus from the Electricity Pricing Review panel on ensuring wider access to network metering data on reasonable terms.

We have also invested in our people and our culture, to ensure we deliver on service expectations, and try to put ourselves in the shoes of our customers at all times. Our customer and staff research reveals that we are continuing to head in the right direction.

In governance matters, long-serving Chairman Michael Stiassny stepped down at November’s annual shareholder meeting, David Bartholomew and Sibylle Krieger stepped down as independent directors in the same month, and Entrust trustee Mike Buczkowski joined the Board as a non-independent director, replacing outgoing Trustee James Carmichael. The Board remains committed to the long-term strategic direction of Vector, and has initiated an independent skills-based review and a new director search to ensure the right skills and composition of the Board are in place for Vector’s future.

The six months has also seen the commencement of the signalled Government review of the electricity sector which, along with the pending Interim Climate Change Commission report, will help guide New Zealand’s transition to 100% renewable energy. Given the macro trends at play, it is timely the Government has this once-in-a-decade opportunity to incentivise investment in the new energy technologies that will help empower customer choice, help solve big market challenges, and help promote more innovation and competition.

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LEADERSHIPChair and Group Chief Executive report

It can set new ground rules for the sector that will maximise benefits for the next generation of energy consumers, promote equitable outcomes, as well as help enable New Zealand’s sustainability ambitions. We also believe it’s an opportunity to recognise the infrastructure demands of high growth areas such as Auckland. We need the right policy settings and investment incentives to ensure high growth and evolving energy needs are met.

It won’t be easy. While New Zealand has long prided itself on its electricity market, it’s clear there are major challenges emerging. Today, our wholesale electricity market is extraordinarily volatile, which exposes retailers without generation capability to significant difficulties. We have limited hydro storage. There is coal being imported to plug the generation gap between supply and demand. We have seen gas production constraints. We have uncertain incentives around technology investment. We have relatively slow uptake of solar, battery and EVs compared with many other countries. And according to the Government, customers are paying more for their energy than ever amidst concerns over energy affordability.

That said, the Electricity Pricing Review Panel’s Options Discussion paper published in late February this year is largely encouraging. It favours options that reflect the importance of new technology, greater resilience and improved customer choice, as well as options that improve market transparency and address practices that may stifle competition or unfairly penalise some consumers. As the review is finalised, we also hope to see an even greater focus on options that improve energy efficiency, and, most importantly, address problems experienced in the wholesale market.

The extraordinary wholesale electricity market volatility was especially noticeable late last year, when wholesale prices appeared to be significantly out of kilter with market conditions. In December, Vector joined an Undesirable Trading Situation submission by a group of independent retailers, asking the Electricity Authority (EA) to look more closely at the wholesale market. We did this because we believe it is not in the interests of consumers to see innovative new retailers being squeezed out of the market. We think that’s an outcome which is bad for consumers, and bad for competition.

Just as importantly, we are nearing the next reset of regulated pricing and quality standards for the electricity distribution sector, scheduled to take place in 2020. What is increasingly clear is that, given the pace of change, the existing regime for quality control, last reset in 2015, no longer reflects the reality of the changed operating environment, particularly in relation to health and safety legislation and the impact of Auckland growth. Therefore, we will continue to work constructively with the Commerce Commission on the new quality standards scheduled to take effect on 1 April 2020, following the regulatory reset process.

The electricity sector is not alone in facing the need to have fit-for-purpose regulation that can meet the difficult challenges presented by rapid technological disruption, volume growth or changing consumer preferences. Many other sectors and their associated regulatory bodies, such as telecommunications, aviation, petrol and banking, are grappling with the same issues.

In other matters, Vector welcomed the High Court’s decision in December on a judicial review of the long-standing Utilities Disputes Limited case. We pursued this because network infrastructure providers, and their customers, would have been potentially significantly impacted by the precedent created by the original decision of the Utilities Disputes Commissioner. This common-sense decision

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LEADERSHIPChair and Group Chief Executive report

Dame Alison Paterson Chair

Simon MackenzieGroup Chief Executive

provides a framework for a more certain outcome in these sorts of scenarios, and ensures infrastructure providers can continue to focus their efforts on all their customers.

We also hope to see genuine progress this year on updating tree management regulation which is already significantly overdue. Updated regulation has been under consideration by the Ministry of Business, Innovation and Employment for several years now, and the April 2018 storm in Auckland provided a sharp reminder of the challenges created when trees near power lines are not adequately managed by owners.

To play our part, we increased the amount we allocate for vegetation management, and in September 2018 launched a new programme to raise awareness of the need to have the right trees in the right places, by planting thousands more. The Vector Urban Forest initiative means we will replace every tree we must cut down for network management or safety purposes, with two new natives, planted in areas that help with local ecological restoration schemes.

Looking ahead to the remainder of FY19, the guidance given in August for adjusted EBITDA remains appropriate. As noted at the time, this guidance did not include the impact of adopting NZ IFRS 15 and 16, which, together with other minor accounting changes, are expected to impact FY19 adjusted EBITDA by approximately $10 million. Our guidance range, adjusted for the impact of these accounting changes, is therefore $480 - $490 million. Our result in the first half of the year benefited particularly from strong electricity volumes. Should this continue in the second half of the year, we would expect the FY19 result to be towards the top end of our guidance range.

Looking further ahead, Vector’s future earnings and ability to pay ongoing increasing dividends could be significantly influenced by the reset of our electricity network revenues for the period 1 April 2020 to 31 March 2025 which is known as the Default Price Path 3 (DPP3).

The Commerce Commission has now largely confirmed the methodology that will apply to this reset. The key remaining variables are the five-year New Zealand Government bond rate during June, July and August 2019 (which is used to set the regulated Weighted Average Cost of Capital for DPP3) and the network expenditure allowances and quality targets that will apply to DPP3. The Commerce Commission expects to announce its draft decision on 31 May 2019 with a final decision due on 28 November 2019. We will provide a further update when we release our full year results. In accordance with our dividend policy, we will review our dividend approach once the parameters for DPP3 have been confirmed.

Regardless, Vector will need to progress its transformation and continue to show leadership on technology, resilience and the provision of customer choice. We are certain that the industry will continue to be disrupted and the impacts of climate change will increasingly be felt. Vector will need to not only stay ahead of the curve, but also to continue to balance the needs of customers today with those of the next generation.

Our vision is for Vector to create a new energy future for New Zealand. A future where customers are fully empowered and have control and choice over where, when and how they use energy. A future where all consumers get the benefits of new energy technologies, not just the more advantaged. We want Vector to attract the best talent in New Zealand and contribute more than our fair share to a more sustainable, more equitable energy system. We want all our people and the public to remain safe around energy.

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BUSINESS SEGMENT REVIEWS

Regulated Network’s adjusted EBITDA for the six months to 31 December 2018 was up $6.02 million (3.1%) to $198.7 million against the prior half-year. This adjusted EBITDA uplift was largely driven by higher electricity volumes because of continued Auckland residential growth and a colder winter compared to the prior year, partially offset by higher maintenance costs. The increase in maintenance costs was largely due to additional expenditure focused on improving network reliability and reducing SAIDI.

Revenue increased 2.6% to $403.1 million, driven by the release of accumulated Loss Rental Rebates3 and an increase in capital contributions, which were up 21.9% to $41.2 million, this reflected continued connection growth and significant infrastructure development taking place across Auckland.

Underlying revenue (net of contributions, Loss Rental Rebates and pass-throughs) was up $7.3 million with an increase in connections and a colder winter. This was partially offset by a decline in gas revenue of $2.0 million, primarily because of the regulatory gas price reset from 1 October 2017.

New electricity connections fell 15.3% to 5,160 from 6,090, but remain elevated relative to historical levels. New gas connections increased 0.8% to 1,669 from 1,656. Total electricity connections stood at 567,009, up 1.3% from 559,777 the previous year. Total gas connections were 110,489, up 2.0% from 108,270 a year ago.

Volumes transported across the electricity network rose 0.9% to 4,390 GWh from 4,352 GWh in the prior year. Average household consumption on our network appears to have stabilised after more than a decade of decline. Auckland gas distribution volumes were flat at 7.7 PJ.

Regulated capital expenditure increased by 4.5% to $125.0 million, with most of the increase in capital expenditure due to Auckland growth and infrastructure development. Net of capital contributions, regulated capital expenditure

REGULATED

2. For the breakdown of NZ IFRS changes by segment see page 21.

3. This represents the accumulation for the six-month period ending 31 December 2018. These Transpower receipts have been released to Other income and a provision for payment is reflected in Other expenses.

remained relatively flat. Notable projects completed during the period included two grid-scale batteries in Warkworth and Snells Beach, as well as additional generator purchases for supporting outage management.

During the period, Vector reached a settlement with the Commerce Commission concerning breaches to the electricity network quality standards that occurred in 2015 and 2016.

NETWORKS

HIGHER ELECTRICITY VOLUMES DRIVEN BY CONTINUED AUCKLAND RESIDENTIAL GROWTH AND A COLDER WINTER.

Proceedings relating to network outages brought against Vector by the Commerce Commission

Vector is aware of media reports regarding the proceedings that have been brought against it by the Commerce Commission under the Commerce Act, for breaches of its quality standards. Some reports suggested Vector’s breaches were caused solely by its decision to change its health and safety practices to avoid work on ‘live lines’, and that the Commission had ignored this in deciding to bring proceedings. These reports are incorrect and the Commerce Commission has asked us to acknowledge that Vector would have breached its quality standard in the relevant years regardless of its changes to ‘live line’ practices. The Commerce Commission in December 2018 stated that its decision to pursue enforcement proceedings against Vector was not based on Vector’s policies for de-energising of lines for safety reasons.

A penalty hearing in relation to these proceedings is scheduled for 6 March 2019.

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BUSINESS SEGMENT REVIEWS

Gas Trading’s adjusted EBITDA was up strongly by 12.5% to $20.74 million from $18.4 million a year earlier, the result benefiting from higher production at the Kapuni Gas Treatment Plant, increased LPG sales and improved cost efficiencies at the new 9kg Bottle Swap processing plant.

That said, this growth is not expected to carry into the second half of the year, due to the loss of a large natural gas customer and rising gas costs.

The natural gas business experienced challenging market conditions during the period. While Kapuni field production was up 14.6% to 5.5PJ, natural gas volumes fell 9.4% to 8.7 PJ as a result of planned and unplanned gas field outages that reduced supply and provided for unprecedented market conditions. Consequently, some of our customers faced significant disruption, and we worked hard to help them mitigate their exposure.

The issues related to gas constraints have raised a number of unresolved questions regarding the transparency of the market.

Our LPG business performed strongly in the first half of the year. Gas liquid sales were up 8.0% to 44,020 tonnes. While Bottle Swap growth is now slowing (volumes up 1.8% on the prior period), we are now benefiting from cost efficiencies at the new plant. LPG tolling volumes were down 8.3% to 81,718 tonnes due to a lack of exports over the period.

TRADING

4. For the breakdown of NZ IFRS changes by segment see page 21.

GAS

INCREASED CAPACITY AT ONGAS BOTTLE SWAP PLANT SUPPORTING SUMMER DEMAND FOR GAS.

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BUSINESS SEGMENT REVIEWS

The Technology segment’s revenue increased 2.3% to $137.0 million from $133.9 million a year earlier driven largely by greater deployment of smart meters. This also contributed to the increase in adjusted EBITDA for the Technology segment, which rose 12.7% to $72.95 million.

Our smart meter fleet grew 11.3% to 1.48 million over the period, including nearly 110,000 smart meters in Australia. We installed more than 45,000 advanced meters in Australia over the first six months of the financial year, and our New Zealand smart meter fleet increased by almost 30,000 (net of replacements).

The metering business in New Zealand was augmented by the acquisition in September 2018 of Vircom, a nationwide provider of field services for commercial and residential smart meters. This business complements our existing metering capabilities and enables us to provide a full-service nationwide metering capability to our customers.

While Vector Communications delivered a steady result, our New Energy Solutions business has had a mixed performance in the first half.

PowerSmart is performing well, with a strong pipeline of projects across New Zealand and the Pacific.

However, E-Co Products (trading as HRV), Vector’s channel to market for healthy and energy efficient home solutions, has faced headwinds. Over the last 12 months we have made several changes; these include closing the HRV retrofit windows business, launching a residential solar offering and more recently, appointing a new CEO, Colin Daly, who joined us in September 2018. While it has underperformed to expectation, we are optimistic that this business unit is well positioned to grow, especially given its strong product mix, the desire of consumers for choice and control and the Government’s focus on healthy and energy efficient homes.

TECHNOLOGY

INSTALLATION OF ONE OF POWERSMART’S PROJECTS, AT THE NEW ZESPRI HQ IN MOUNT MAUNGANUI.

5. For the breakdown of NZ IFRS changes by segment see page 21.

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ACCOUNTING CHANGES

From 1 July 2018, Vector has adopted two new accounting standards (NZ IFRS 15 Revenue from Contracts with Customers and NZ IFRS 16 Leases6) and made a change to the way in which we account for the disposal of fixed assets.

Of the two accounting standards, NZ IFRS 16 poses the most significant financial impact in both the balance sheet and the profit and loss statement. NZ IFRS 16 requires that the value of the outstanding liability for leases is calculated using Vector’s incremental borrowing rate at the date of transition7. The right of use asset is then recognised and measured at a value equalling the lease liability, adjusted for lease incentives recorded on the balance sheet. Under the modified retrospective approach, the H1 2018 comparatives are not restated.

Vector’s right of use asset value is driven predominantly by property leases. This includes leases for offices, warehouses, data rooms, and buildings.

The key impact in the profit and loss statement is a reduction in the amount of operating expense reported, offset by an increase in interest and depreciation. The impact for the six months ending 31 December 2018 is a reduction to operating expenses of $4.0 million and an increase to depreciation of $3.5 million and interest cost of $1.0 million.

The impact of NZ IFRS 15 is an increase in revenue of $0.6 million.

In addition to the adoption of NZ IFRS 15 and 16, Vector has also reassessed the presentation of gains and losses on disposal of fixed assets within our statement of profit and loss.

Historically, disposal losses have been included within ‘Operating Expenses’. Disposal losses are also included within the Group’s non-GAAP profit measures of EBITDA and adjusted EBITDA.

From 1 July 2018, we have included disposal gains and losses with Depreciation and Amortisation. In the six months ending 31 December 2018, $1.4 million of disposal losses has been reclassified from Operating Expenses to Depreciation and Amortisation. The H1 2018 comparatives have not been restated8.

IMPACT OF NZ IFRS CHANGES ON H1 2019 ADJUSTED EBITDA $M

Segment NZ IFRS 15 NZ IFRS 16 Total

Regulated Networks 0.6 0.6 1.2Gas Trading – 0.7 0.7Technology – 2.0 2.0Corporate – 0.7 0.7Total 0.6 4.0 4.6

6. We have adopted the modified retrospective approach.7. Both standards are effective from 1 July 2018.8. Prior year comparative value was $0.1m.

ACCOUNTINGCHANGES

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BUSINESS SEGMENT REVIEWS

Vector takes a comprehensive, Group-wide and future-focused approach to fostering and protecting the things that are already of, or we believe can create, material value for the business, including people, communities, assets and the environment.

This means we strive to understand the macro forces in which we operate and the value drivers and enablers for our people, business, stakeholders and customers. And we believe Vector has a responsibility to lead, not follow, in acting and advocating for the things that matter.

The six months to 31 December 2018 saw continued business leadership. In October 2018, Vector was recognised as the first New Zealand business to receive the Accessibility Tick. The Accessibility Tick is a public recognition of an organisation’s ongoing commitment to becoming accessible and inclusive of people with disabilities. We did this because we believe diverse, inclusive and accessible workplaces results in a more successful business and can help attract talent.

In October 2018, Vector also introduced new enhancements to our parental leave policy which aim to reduce the financial burden for new parents and provide extra time off for employees to support their partners. As part of this we are offering to top up the Government Primary Carers payments to support new parents.

Vector continues to work with young women to promote interest in Science, Technology, Engineering and Maths (STEM) careers. In the first half of the financial year we supported initiatives including ShadowTech, Rosie Revere Engineer and entered into a sponsorship agreement with GirlBoss New Zealand. The sponsorship involves funding ten workshops in secondary schools and introduces a sustainability award category to the GirlBoss New Zealand Awards which recognises the achievements of trailblazing young women.

PEOPLE, SAFETY

VECTOR WON THE 2018 DELOITTE ENERGY EXCELLENCE HEALTH & SAFETY AWARD FOR THE PAPAKURA BOTTLE SWAP PLANT.

& RISK

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BUSINESS SEGMENT REVIEWS

In August 2018, Vector won the Deloitte Energy Excellence 2018 Health & Safety Initiative of the Year Award for the Papakura Bottle Swap plant – a greenfield development of a state of the art facility which was the first plant in New Zealand to be accepted as a major hazards facility under the safety case regime.

Vector remains one of a small number of businesses that is Living Wage accredited. We have also continued to proactively address pay equity, analysing average hourly pay rates across the company as well as across role types and role seniority. A small number of pay equity issues were identified and have now been addressed.

Vector Urban Forest, an initiative to encourage planting away from power lines, was launched in September 2018 with the planting of over 15,000 trees at Puhinui Reserve in Auckland. As part of this programme, Vector has committed to planting two trees for every tree removed for network purposes.

To address the issue of end-of-life lithium ion batteries we have convened a Battery Leaders Group to identify circular solutions for large batteries. In November 2018, a workshop was held with stakeholders across the automotive, energy and waste industries to explore future scenarios for maximising the value of second-life batteries.

In safety, a continued focus over the six months saw Total Recordable Injury Frequency Rates (TRIFR) decrease by 17%. Lost Time Injury Frequency Rates (LTIFR) reduced by 59%.

In October 2018, Vector was successfully reaccredited to AS/NZS 7901, which is a standard that covers our health and safety processes and performance around public safety regarding our gas and electricity assets. Vector will reaccredit to AS/NZS 4801 for our health and safety systems and performance and to ISO 14001 for our environmental systems and performance.

We have also changed the way we record and collect information about injuries, even pre-existing ones. For example, OnGas deliveries involve a high degree of manual handling of gas bottles. We now have a far better insight into the nature and type of strains and sprains and have implemented a nationwide triage process to ensure treatment starts as early as possible.

IN SEPTEMBER 2018, VECTOR PLANTED MORE THAN 15,000 NEW TREES TO LAUNCH ITS URBAN FOREST INITIATIVE.

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OPERATING STATISTICSFor the six months ended 31 December

2018 2017

ELECTRICITYCustomers1, 5 567,009 559,777New connections 5,160 6,090Net movement in customers2 3,933 54,677Volume distributed (GWh) 4,390 4,352Networks length (km)1 18,783 18,607SAIDI (minutes)3

Normal operations4 156.7 168.0 Extreme events 361.4 0.0Total 518.1 124.8GAS DISTRIBUTIONCustomers1, 5 110,489 108,270New connections 1,669 1,656Net movement in customers2 1,260 1,600Volume distributed (PJ) 7.7 7.7GAS TRADINGNatural gas sales (PJ)6 8.7 9.6Gas liquid sales (tonnes)7 44,020 40,7529kg LPG bottles swapped8 358,208 351,962Liquigas LPG tolling (tonnes)9 81,718 89,147TECHNOLOGYElectricity: smart meters1, 10 1,480,851 1,333,208Electricity: legacy meters1 81,170 91,848Gas meters1 226,495 223,368

1. As at 31 December.2. Net number of customers

added during the period, includes disconnected, reconnected and decommissioned ICPs.

3. SAIDI (minutes) for the 9 months ended 31 December 2018 is an unaudited value and subject to change.

4. Normal operations SAIDI includes the impact of 7 Major Event Days at the cap of 3.37 SAIDI minutes for each event.

5. Billable ICPs.6. Excludes gas sold as gas

liquids as these sales are included within the gas liquids sales tonnages.

7. Total of retail and wholesale LPG and natural gasoline. Includes wholesale volumes from Kapuni and retail volumes via Ongas. Product sold from Kapuni to Ongas is counted twice for the purpose of this metric.

8. Number of 9kg LPG bottles swapped and sold during the year.

9. Product tolled in Taranaki and further tolled in the South Island is counted twice for the purposes of this metric.

10. The number of smart meters deployed as at 31 December 2018 includes 146,062 meters managed but not owned by Vector (31 December 2017: 118,961).

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FINANCIAL OVERVIEW

FINANCIAL PERFORMANCE

$ MILLION31 DEC 2018

6 MONTHS31 DEC 2017

6 MONTHS CHANGE30 JUN 2018

12 MONTHS

Total income 688.6 676.2 1.8% 1,328.4Adjusted EBITDA 264.7 250.0 5.9% 470.1Adjusted EBIT 144.8 140.4 3.1% 244.2Net profit 83.3 79.0 5.4% 149.8Operating cash flow 219.1 236.0 (7.2%) 389.9

FINANCIAL POSITION

$ MILLION 31 DEC 2018 31 DEC 2017 CHANGE 30 JUN 2018

Total equity 2,451.1 2,468.1 (0.8%) 2,457.9Total assets 5,934.3 5,668.3 4.7% 5,808.0Economic net debt (borrowings net of cash and short-term deposits) 2,449.3 2,252.9 8.7% 2,337.8

KEY FINANCIAL MEASURES

31 DEC 20186 MONTHS

31 DEC 2017 6 MONTHS CHANGE

30 JUN 2018 12 MONTHS

Adjusted EBITDA/total income 38.4% 37.0% 3.8% 35.4%Adjusted EBIT/total income 21.0% 20.8% 1.0% 18.4%Equity/total assets 41.3% 43.5% (5.1%) 42.3%Gearing1 49.6% 47.3% 4.9% 48.8%Net interest cover - (adjusted EBIT/ net interest costs) (times) 2.0 2.1 (3.8%) 1.9Earnings (NPAT) per share (cents) 8.3 7.9 5.1% 14.8Dividends declared, cents per share (fully imputed) 8.25 8.25 0.0% 16.25

1. Gearing is defined as economic net debt to economic net debt plus adjusted equity. Adjusted equity means total equity adjusted for hedge reserves.

Rises 1.8% on the previous corresponding period

Total income

$688.6M

Falls 7.2% on the previous corresponding period

Operating cash flow

$219.1M

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FINANCIAL PERFORMANCE TRENDS

REGULATED NETWORKS GAS TRADING TECHNOLOGY CORPORATE INTER-SEGMENT

CONTINUED OPERATIONS DISCONTINUED OPERATIONS

2014 2015 2016 2017 2018

618.9 590.6 625.6676.2 688.6

-100

100

0

200

300

400

600

500

800

700

TOTAL INCOME (CONTINUING OPERATIONS) FOR THE SIX MONTHS ENDED 31 DECEMBER

$ MILLION

244.8 253.5 250.0264.7

2014 2015 2016 2017 2018

0

-50

50

100

150

200

250

300257.0

ADJUSTED EBITDA (CONTINUING OPERATIONS) FOR THE SIX MONTHS ENDED 31 DECEMBER

$ MILLION

REGULATED NETWORKS GAS TRADING TECHNOLOGY CORPORATE TOTAL GROUP

2014 2015 2016 2017 2018

87.3

100.1107.1

79.083.3

0

20

40

60

80

100

120

NET PROFIT (INCLUDING DISCONTINUED OPERATIONS) FOR THE SIX MONTHS ENDED 31 DECEMBER

$ MILLION

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FINANCIAL PERFORMANCE TRENDS

7.9

125.0

6.0

62.2

2018201712.3

40.2

10.6119.6

CAPITAL EXPENDITURE FOR THE SIX MONTHS ENDED 31 DECEMBER

$ MILLION

REGULATED NETWORKS GAS TRADING TECHNOLOGY CORPORATE

20182017

2,449.32,252.9

2,492.7 2,512.9

SOURCE OF FUNDING – GEARING AS AT 31 DECEMBER

$ MILLION

ECONOMIC NET DEBT ADJUSTED EQUITY

2014 2015 2016 2017 2018

203.3

248.8226.3 236.0

219.1

0

50

100

150

200

250

300

OPERATING CASH FLOWS (INCLUDING DISCONTINUED OPERATIONS) FOR THE SIX MONTHS ENDED 31 DECEMBER

$ MILLION

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NON-GAAP FINANCIAL INFORMATION

Vector’s standard profit measure prepared under New Zealand Generally Accepted Accounting Practice (GAAP) is net profit. Vector has used non-GAAP profit measures when discussing financial performance in this document. The directors and management believe that these measures provide useful information as they are used internally to evaluate performance of business units, to establish operational goals and to allocate resources. For a more comprehensive discussion on the use of non-GAAP profit measures, please refer to the policy ‘Reporting non-GAAP profit measures’ available on our website (www.vector.co.nz).

Non-GAAP profit measures are not prepared in accordance with New Zealand International Financial Reporting Standards (NZ IFRS) and are not uniformly defined, therefore the non-GAAP profit measures reported in this document may not be comparable with those that other companies report and should not be viewed in isolation from or considered as a substitute for measures reported by Vector in accordance with NZ IFRS.

DEFINITIONSEBITDA: Earnings before interest, taxation, depreciation and amortisation from

continuing operations

Adjusted EBITDA: EBITDA from continuing operations adjusted for fair value changes, associates, impairments, capital contributions, and significant one-off gains, losses, revenues and/or expenses.

RECONCILIATION:

Group EBITDA and adjusted EBITDA

31 DEC 20186 MONTHS

$M

31 DEC 20176 MONTHS

$M

Reported net profit for the period (GAAP)1 83.3 79.0 Add back: net interest costs1 71.7 66.4 Add back: tax (benefit)/expense1 31.3 31.9 Add back: depreciation and amortisation1 119.9 109.6 EBITDA 306.2 286.9 Adjusted for:Associates (share of net (profit)/loss)1 (0.5) 0.1 Fair value change on financial instruments1 0.2 (2.8)Capital contributions1 (41.2) (34.2)Adjusted EBITDA 264.7 250.0

1. Extracted from reviewed financial statements.

Segment adjusted EBITDA 2018 2017

Six months ended 31 December

REPORTED SEGMENT

EBITDA

LESS CAPITAL CONTRI-BUTIONS

SEGMENT ADJUSTED

EBITDA

REPORTED SEGMENT

EBITDA

LESS CAPITAL CONTRI-BUTIONS

SEGMENT ADJUSTED

EBITDA

Technology 72.9 – 72.9 65.1 (0.4) 64.7

Gas Trading 20.7 – 20.7 18.4 – 18.4

Unregulated segments 93.6 – 93.6 83.5 (0.4) 83.1

Regulated Networks segment 239.9 (41.2) 198.7 226.5 (33.8) 192.7

Corporate (27.6) – (27.6) (25.8) – (25.8)

TOTAL 305.9 (41.2) 264.7 284.2 (34.2) 250.0

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GROUP CONDENSED INTERIM FINANCIAL STATEMENTSfor the six months ended 31 December 2018 (unaudited)

CONTENTS

30 ——— Independent Review Report

32 ——— Group Condensed Interim Financial Statements

32 ——— Profit or Loss

33 ——— Other Comprehensive Income

34 ——— Balance Sheet

35 ——— Cash Flows

36 ——— Changes in Equity

37 ——— Notes to the Group Condensed Interim Financial Statements

GROUP CONDENSED INTERIM FINANCIAL STATEMENTS

These group condensed interim financial statements for the six months ended 31 December 2018 are dated 25 February 2019, and signed for and on behalf of Vector Limited by:

Director 25 February 2019

Director 25 February 2019

And management of Vector Limited by:

Group Chief Executive 25 February 2019

Chief Financial Officer 25 February 2019

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INDEPENDENT REVIEW REPORTfor the six months ended 31 December 2018

© 2019 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

Independent Review Report To the shareholders of Vector Limited

Report on the interim consolidated financial statements

Conclusion Based on our review, nothing has come to our attention that causes us to believe that the interim consolidated financial statements on pages 32 to 48 do not:

i. present fairly in all material respects the Group’s financial position as at 31 December 2018 and its financial performance and cash flows for the 6 month period ended on that date; and

ii. comply with NZ IAS 34 Interim Financial Reporting.

We have completed a review of the accompanying interim consolidated financial statements which comprise:

— the consolidated balance sheet as at 31 December 2018;

— the consolidated statements of profit and loss, other comprehensive income, changes in equity and cash flows for the 6 month period then ended; and

— notes, including a summary of significant accounting policies and other explanatory information.

Basis for conclusion

A review of interim consolidated financial statements in accordance with NZ SRE 2410 Review of Financial Statements Performed by the Independent Auditor of the Entity (“NZ SRE 2410”) is a limited assurance engagement. The auditor performs procedures, consisting of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

As the auditor of Vector Limited, NZ SRE 2410 requires that we comply with the ethical requirements relevant to the audit of the annual financial statements.

Our firm has also provided other services to the group in relation to regulatory, other assurance, IT forensic and other forensic services. Subject to certain restrictions, partners and employees of our firm may also deal with the group on normal terms within the ordinary course of trading activities of the business of the group. These matters have not impaired our independence as reviewer of the group. The firm has no other relationship with, or interest in, the group.

Use of this Independent Review Report

This report is made solely to the shareholders as a body. Our review work has been undertaken so that we might state to the shareholders those matters we are required to state to them in the Independent Review Report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the shareholders as a body for our review work, this report, or any of the opinions we have formed.

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INDEPENDENT REVIEW REPORTfor the six months ended 31 December 2018

Responsibilities of the Directors for the interim consolidated financial statements The Directors, on behalf of the group, are responsible for:

— the preparation and fair presentation of the interim consolidated financial statements in accordance with NZ IAS 34 Interim Financial Reporting;

— implementing necessary internal control to enable the preparation of interim consolidated financial statements that are fairly presented and free from material misstatement, whether due to fraud or error; and

— assessing the ability to continue as a going concern. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate or to cease operations, or have no realistic alternative but to do so.

Auditor’s Responsibilities for the review of the interim consolidated financial statements Our responsibility is to express a conclusion on the interim financial statements based on our review. We conducted our review in accordance with NZ SRE 2410. NZ SRE 2410 requires us to conclude whether anything has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with NZ IAS 34 Interim Financial Reporting.

The procedures performed in a review are substantially less than those performed in an audit conducted in accordance with International Standards on Auditing (New Zealand). Accordingly we do not express an audit opinion on these interim consolidated financial statements.

This description forms part of our Independent Review Report.

KPMG Auckland

25 February 2019

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GROUP INTERIM PROFIT OR LOSS(unaudited)

NOTE

31 DEC 20186 MONTHS

$M

31 DEC 20176 MONTHS

$M

30 JUN 201812 MONTHS

$M

Revenue 4 688.6 676.2 1,328.4Operating expenses 4 (382.7) (392.0) (786.8)Depreciation and amortisation (119.9) (109.6) (225.9)Interest costs (net) (71.7) (66.4) (130.7)Fair value change on financial instruments (0.2) 2.8 3.1Associates (share of net profit/(loss)) 0.5 (0.1) (1.5)Profit/(loss) before income tax 114.6 110.9 186.6Tax benefit/(expense) (31.3) (31.9) (36.8)Net profit/(loss) for the period 83.3 79.0 149.8

Net profit/(loss) for the period attributable toNon-controlling interests 0.7 0.7 1.6Owners of the parent 82.6 78.3 148.2

Basic and diluted earnings per share (cents) 7 8.3 7.9 14.8

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GROUP INTERIM OTHER COMPREHENSIVE INCOME (unaudited)

31 DEC 20186 MONTHS

$M

31 DEC 20176 MONTHS

$M

30 JUN 201812 MONTHS

$M

Net profit/(loss) for the period 83.3 79.0 149.8Other comprehensive income net of taxItems that may be re-classified subsequently to profit or loss:Net change in fair value of hedge reserves (1.5) 4.2 8.9Translation of foreign operations (1.2) (0.3) (0.3)Items that will not be re-classified subsequently to profit or loss:Fair value change on financial asset – 3.1 1.1Other comprehensive income for the period net of tax (2.7) 7.0 9.7Total comprehensive income for the period net of tax 80.6 86.0 159.5

Total comprehensive income for the period attributable toNon-controlling interests 0.7 0.7 1.6Owners of the parent 79.9 85.3 157.9

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GROUP INTERIM BALANCE SHEET(unaudited)

NOTE31 DEC 2018

$M31 DEC 2017

$M30 JUN 2018

$M

CURRENT ASSETS Cash and cash equivalents 26.5 17.9 27.9Trade and other receivables 204.6 213.3 210.0Derivatives 6 – 0.1 0.1Inventories 10.7 12.9 11.6Intangible assets 10.4 6.0 1.0Income tax 65.4 32.7 84.7Total current assets 317.6 282.9 335.3

NON-CURRENT ASSETSReceivables 0.2 – 0.1Derivatives 6 75.5 45.2 56.5Investment in associate 8.6 9.5 8.1Other investments 15.0 23.3 15.0Intangible assets 1,398.0 1,393.8 1,397.2Property, plant and equipment (PPE) 4,080.4 3,913.5 3,995.7Right of use assets (ROU) 9.1 38.9 – –Deferred tax 0.1 0.1 0.1Total non-current assets 5,616.7 5,385.4 5,472.7Total assets 5,934.3 5,668.3 5,808.0

CURRENT LIABILITIESTrade and other payables 217.0 234.1 219.1Provisions 13.1 4.8 24.4Borrowings 6, 12 513.0 – 224.2Derivatives 6 69.3 – 65.8Contract liabilities 2 43.5 37.8 39.4Lease liabilities 9.2 8.9 – –Income tax 0.4 0.4 0.7Total current liabilities 865.2 277.1 573.6

NON-CURRENT LIABILITIESPayables 8.2 9.9 9.1Provisions 23.6 21.4 22.6Borrowings 6 1,966.8 2,232.0 2,171.1Derivatives 6 54.9 135.7 51.2Contract liabilities 2 38.0 35.1 35.8Lease liabilities 9.2 31.3 – –Deferred tax 495.2 489.0 486.7Total non-current liabilities 2,618.0 2,923.1 2,776.5Total liabilities 3,483.2 3,200.2 3,350.1

EQUITYEquity attributable to owners of the parent 2,433.5 2,450.3 2,440.4Non-controlling interests in subsidiaries 17.6 17.8 17.5Total equity 2,451.1 2,468.1 2,457.9Total equity and liabilities 5,934.3 5,668.3 5,808.0

Net tangible assets per share (cents) 7 102.5 105.1 104.2Gearing ratio (%) 7 49.6 47.3 48.8

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GROUP INTERIM CASH FLOWS (unaudited)

NOTE

31 DEC 20186 MONTHS

$M

31 DEC 20176 MONTHS

$M

30 JUN 201812 MONTHS

$M

CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers 691.7 693.1 1,312.2Interest received 0.5 0.4 2.0Dividends received – 0.5 0.5Payments to suppliers and employees (399.3) (389.0) (736.5)Interest paid (72.0) (67.4) (127.0)Income tax paid (1.8) (1.6) (61.3)Net cash flows from/(used in) operating activities 8 219.1 236.0 389.9

CASH FLOWS FROM INVESTING ACTIVITIESProceed from sale of PPE and software intangibles 0.2 0.1 0.4Proceeds from sale of investments – – 7.8Purchase and construction of PPE and software intangibles (202.7) (184.9) (386.8)Post-completion payment for acquisition of businesses – – (1.4)Other investments (3.5) (15.7) (15.7)Net cash flows from/(used in) investing activities (206.0) (200.5) (395.7)

CASH FLOWS FROM FINANCING ACTIVITIESProceeds from borrowings 6 70.0 435.8 570.8Repayment of borrowings 6 – (400.0) (400.0)Dividends paid (80.6) (80.2) (163.9)Sale of treasury shares – 14.0 14.0Lease liabilities payments (3.6) – –Other financing cash flows (0.3) (2.1) (2.1)Net cash flows from/(used in) financing activities (14.5) (32.5) 18.8Net increase/(decrease) in cash and cash equivalents (1.4) 3.0 13.0Cash and cash equivalents at beginning of the period 27.9 14.9 14.9Cash and cash equivalents at end of the period 26.5 17.9 27.9

Cash and cash equivalents comprise:Bank balances and on-call deposits 18.2 9.5 19.6Short term deposits 8.3 8.4 8.3 26.5 17.9 27.9

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GROUP INTERIM CHANGES IN EQUITY (unaudited)

ISSUED SHARE

CAPITAL$M

TREASURY SHARES

$M

HEDGE RESERVES

$M

OTHER RESERVES

$M

RETAINED EARNINGS

$M

NON- CONTROLLING

INTERESTS$M

TOTAL EQUITY

$M

Balance at 1 July 2017 875.0 (9.2) (49.0) 0.8 1,613.0 17.7 2,448.3Net profit/(loss) for the period – – – – 78.3 0.7 79.0Other comprehensive income – – 4.2 2.8 – – 7.0Total comprehensive income – – 4.2 2.8 78.3 0.7 86.0Dividends – – – – (79.6) (0.6) (80.2)Sale of treasury shares 5.0 9.0 – – – – 14.0Total transactions with owners 5.0 9.0 – – (79.6) (0.6) (66.2)Balance at 31 December 2017 880.0 (0.2) (44.8) 3.6 1,611.7 17.8 2,468.1Net profit/(loss) for the period – – – – 69.9 0.9 70.8Other comprehensive income – – 4.7 (2.0) – – 2.7Total comprehensive income – – 4.7 (2.0) 69.9 0.9 73.5Dividends – – – – (82.5) (1.2) (83.7)Total transactions with owners – – – – (82.5) (1.2) (83.7)Reclassification on sale of financial asset – – – (1.9) 1.9 – –Balance at 30 June 2018 880.0 (0.2) (40.1) (0.3) 1,601.0 17.5 2,457.9Impact of adopting NZ IFRS 15 at 1 July 2018 – – – – (6.6) – (6.6)Adjusted balance at 1 July 2018 880.0 (0.2) (40.1) (0.3) 1,594.4 17.5 2,451.3Net profit/(loss) for the period – – – – 82.6 0.7 83.3Other comprehensive income – – (1.5) (1.2) – – (2.7)Total comprehensive income – – (1.5) (1.2) 82.6 0.7 80.6Dividends (refer Note 3) – – – – (80.0) (0.6) (80.6)Employee share purchase scheme transactions – (0.2) – – – – (0.2)Total transactions with owners – (0.2) – – (80.0) (0.6) (80.8)Balance at 31 December 2018 880.0 (0.4) (41.6) (1.5) 1,597.0 17.6 2,451.1

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NOTES TO THE INTERIM FINANCIAL STATEMENTS

1. COMPANY INFORMATION

Reporting entity Vector Limited is a company incorporated and domiciled in New Zealand, registered under the Companies Act 1993 and listed on the NZX Main Board (NZX). The company is an FMC entity for the purposes of Part 7 of the Financial Markets Conduct Act 2013. Vector’s condensed interim financial statements (the interim financial statements) comply with this Act.

The interim financial statements presented are for Vector Limited Group (“Vector” or “the group”) as at, and for the six months ended 31 December 2018. The group comprises Vector Limited (“the parent”), its subsidiaries, and its investments in associates and joint arrangements.

Vector Limited is a 75.1% owned subsidiary of Entrust which is the ultimate parent entity for the group.

The primary operations of the group are electricity and gas distribution, natural gas and LPG sales, gas processing, metering, telecommunications and new energy solutions.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation The interim financial statements have been prepared in accordance with New Zealand Generally Accepted Accounting Practice (NZ GAAP) as applicable to interim financial statements, and as appropriate to profit oriented entities. They comply with NZ IAS 34 Interim Financial Reporting.

These interim financial statements do not include all of the information required for full annual financial statements and should be read in conjunction with the group financial statements and related notes included in Vector’s 2018 Annual Report. The interim financial statements for the six months ended 31 December 2018 and 31 December 2017 are unaudited.

All financial information is presented in New Zealand dollars ($) and has been rounded to the nearest 100,000, unless otherwise stated.

Seasonality Vector’s electricity and gas businesses are affected by the seasonal demand for energy, which generally increases during periods of colder weather. Accordingly, financial results for the first half of the financial year reported in the interim financial statements are generally more profitable than those of the second half of the year.

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NOTES TO THE INTERIM FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

New standards adopted

On 1 July 2018 the following accounting standards were adopted:

i) NZ IFRS 15: Revenue from Contracts with Customers

ii) NZ IFRS 16: Leases

NZ IFRS 15: Revenue from Contracts with Customers

The group has adopted NZ IFRS 15 Revenue from Contracts with Customers, effective from 1 July 2018, using the cumulative retrospective approach. The cumulative effect from adoption (if any) is recognised at the date of transition, which is 1 July 2018.

NZ IFRS 15 provides an entity with guiding principles on when, how, and how much revenue to recognise in an entity’s financial statements in any given reporting period. The standard and its subsequent amendment replace all existing IFRS guidance for revenue recognition. The application and adoption of NZ IFRS 15 to the group’s revenue streams has not had a significant impact on the group’s financial performance or financial position. The group did not apply any practical expedients available in NZ IFRS 15.

Details of the new significant accounting policies under NZ IFRS 15 in relation to the group’s key revenue streams are set out below.

Key revenue streams

Significant accounting policies Impact from NZ IFRS 15 adoption

Electricity and gas distribution services

Electricity and gas distribution services are measured at fair value, to the extent that pricing is determined by the regulator in accordance with a matrix of determinations. Revenue is recognised over time using an output method. The right to payment corresponds directly with the customers’ pattern of electricity and gas consumption.

None

Third party contributions

Third party contributions towards the construction of property, plant and equipment are recognised over time, reflecting the percentage completion of the underlying construction activity or the performance obligation if the activity is bundled with other distinct goods or services.

A contract liability is presented on the balance sheet representing that portion of consideration received from the customer on acceptance of a contract but that the performance obligation associated with the contract is not yet satisfied. This liability was previously disclosed as a part of trade and other payables.

The timing of revenue recognition has changed for some construction contracts.

The cumulative effect of $6.6 million (net of tax) from initially applying IFRS 15 is adjusted to opening retained earnings. The impact on the profit or loss is a $0.6 million increase in revenue.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Key revenue streams

Significant accounting policies Impact from NZ IFRS 15 adoption

Sale of natural gas

The group receives revenues from customers for the provision of a continuous supply of natural gas over a time period. Revenue is recognised over time in line with the customer’s consumption of natural gas and measured at the transaction price of the contract. The transaction price for a gas supply contract includes variable consideration in the form of indexed pricing, volume pricing, and take or pay arrangements. The group estimates the amount of variable considerations present in each contract using the expected value method, which is the sum of probability-weighted amounts in a range of possible consideration amounts.

None

Metering revenue

Metering revenue earned from the provision of metering services is recognised over time as the customer simultaneously receives and consumes the benefits from operations of the group’s network of smart meters.

None

New standards adopted

NZ IFRS 16: Leases

The group has elected to early adopt NZ IFRS 16 Leases, effective from 1 July 2018. The group applied NZ IFRS 16 using the modified retrospective transition approach. Comparative information and opening equity are therefore not restated and continue to be reported under NZ IAS 17 Leases and IFRIC 4 Determining whether an Arrangement contains a Lease. Refer to note 9 for details of accounting policies and impact from adoption of NZ IFRS 16.

New standard effective and previously adopted

NZ IFRS 9: Financial Instruments

NZ IFRS 9 Financial Instruments is mandatory for the group effective from 1 July 2018.

The group has previously completed the adoption of NZ IFRS 9 by electing to early adopt NZ IFRS 9 (2013) Financial Instruments in the year ended 30 June 2015 (initial application 1 July 2014) and NZ IFRS 9 (2014) Financial Instruments in the year ended 30 June 2017 (initial application 1 July 2016).

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3. SIGNIFICANT TRANSACTIONS AND EVENTS

Significant transactions and events that have occurred during the six months to 31 December 2018:

Commerce Commission settlement

Over-recovery of electricity revenue

On 7 July 2017, Vector and the Commerce Commission (“the Commission”) agreed the settlement of an over-recovery of electricity revenue by Vector during the regulatory years ended 31 March 2014 and 31 March 2015.

The settlement is effected through a $13.9 million (including accumulated interest of $3.8 million) price adjustment for the regulatory years ending 31 March 2019 and 31 March 2020, impacting the group’s reported revenues and interest costs for the financial years ended 30 June 2018 (3 months), and financial years ending 30 June 2019 (12 months) and 2020 (9 months).

The estimated impact in the current year ended 30 June 2019 is a $4.3 million decrease in revenue and a $1.5 million increase in interest costs.

Dividends Vector Limited’s final dividend for the year ended 30 June 2018 of 8.00 cents per share was paid on 14 September 2018, with a supplementary dividend of 1.41 cents per non-resident share. The total dividend paid was $80.0 million.

Liquigas Limited, a subsidiary company of the group, paid an interim dividend for the six months ended 31 December 2018 of $0.6 million to the company’s non-controlling interests.

4. SEGMENT INFORMATION

Segments Vector reports on three reportable segments in accordance with NZ IFRS 8 Operating Segments. The segments and related policies remain unchanged from those reported in Vector’s 2018 Annual Report.

The reported segments are:

Regulated Networks Auckland electricity and gas distribution services.

Gas Trading Natural gas and LPG sales, storage and processing, and cogeneration.

Technology Metering services, telecommunications and new energy solutions.

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4. SEGMENT INFORMATION (continued)

31 DEC 20186 MONTHS

REGULATED NETWORKS

$MGAS TRADING

$MTECHNOLOGY

$M

INTER-SEGMENT

$MTOTAL

$M

External revenue:Sales 354.3 152.9 134.5 – 641.7Third party contributions 41.2 – – – 41.2Other 5.5 – – – 5.5

Intersegment revenue 2.1 – 2.5 (4.6) –Segment revenue 403.1 152.9 137.0 (4.6) 688.4External expenses:

Electricity transmission expenses (105.0) – – – (105.0)Gas purchases and production expenses – (95.1) – – (95.1)Technology cost of sales – – (34.7) – (34.7)Asset maintenance expenses (29.8) (8.2) (5.7) – (43.7)Employee benefit expenses (8.1) (6.8) (15.0) – (29.9)Other expenses (18.7) (19.6) (8.2) – (46.5)

Intersegment expenses (1.6) (2.5) (0.5) 4.6 –Segment operating expenses (163.2) (132.2) (64.1) 4.6 (354.9)Segment EBITDA 239.9 20.7 72.9 – 333.5Depreciation and amortisation (60.0) (7.7) (44.4) – (112.1)Segment profit/(loss) 179.9 13.0 28.5 – 221.4

Segment capital expenditure 125.0 6.0 62.2 – 193.2

Reconciliation to revenue, profit/(loss) before income tax and capital expenditure reported in the financial statements:31 DEC 20186 MONTHS

REVENUE$M

PROFIT/(LOSS) BEFORE

INCOME TAX$M

CAPITAL EXPENDITURE

$M

Reported in segment information 688.4 221.4 193.2Amounts not allocated to segments (corporate activities):Revenue 0.2 0.2 –Employee benefit expenses – (16.0) –Other operating expenses – (11.8) –Depreciation and amortisation – (7.8) –Interest costs (net) – (71.7) –Fair value change on financial instruments – (0.2) –Associates (share of net profit/(loss)) – 0.5 –Capital expenditure – – 7.9Reported in the financial statements 688.6 114.6 201.1

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4. SEGMENT INFORMATION (continued)

31 DEC 20176 MONTHS

REGULATED NETWORKS

$MGAS TRADING

$MTECHNOLOGY

$M

INTER-SEGMENT

$MTOTAL

$M

External revenue: Sales 356.6 153.5 131.1 – 641.2Third party contributions 33.8 – 0.4 – 34.2

Intersegment revenue 2.3 – 2.4 (4.7) –Segment revenue 392.7 153.5 133.9 (4.7) 675.4External expenses:

Electricity transmission expenses (111.9) – – – (111.9)Gas purchases and production expenses – (98.0) – – (98.0)Technology cost of sales – – (35.6) – (35.6)Asset maintenance expenses (28.8) (9.0) (6.9) – (44.7)Employee benefit expenses (8.4) (7.4) (17.4) – (33.2)Other expenses (15.5) (17.9) (8.6) – (42.0)

Intersegment expenses (1.6) (2.8) (0.3) 4.7 –Segment operating expenses (166.2) (135.1) (68.8) 4.7 (365.4)Segment EBITDA 226.5 18.4 65.1 – 310.0Depreciation and amortisation (56.9) (9.9) (35.9) – (102.7)Segment profit/(loss) 169.6 8.5 29.2 – 207.3

Segment capital expenditure 119.6 10.6 40.2 – 170.4

Reconciliation to revenue, profit/(loss) before income tax and capital expenditure reported in the financial statements:31 DEC 2017

REVENUE$M

PROFIT/(LOSS) BEFORE

INCOME TAX$M

CAPITAL EXPENDITURE

$M

Reported in segment information 675.4 207.3 170.4Amounts not allocated to segments (corporate activities):Revenue 0.8 0.8 –Employee benefit expenses – (14.7) –Other operating expenses – (11.9) –Depreciation and amortisation – (6.9) –Interest costs (net) – (66.4) –Fair value change on financial instruments – 2.8 –Associates (share of net profit/(loss)) – (0.1) –Capital expenditure – – 12.3Reported in the financial statements 676.2 110.9 182.7

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4. SEGMENT INFORMATION (continued)

30 JUN 201812 MONTHS

REGULATED NETWORKS

$MGAS TRADING

$MTECHNOLOGY

$M

INTER-SEGMENT

$MTOTAL

$M

External revenue:Sales 684.6 290.3 263.9 – 1,238.8Third party contributions 70.2 – 1.3 – 71.5Other 17.2 – – – 17.2

Intersegment revenue 4.2 – 8.4 (12.6) –Segment revenue 776.2 290.3 273.6 (12.6) 1,327.5External expenses:

Electricity transmission expenses (220.6) – – – (220.6)Gas purchases and production expenses – (187.1) – – (187.1)Technology cost of sales – – (78.5) – (78.5)Network and asset maintenance expenses (58.4) (16.9) (12.4) – (87.7)Employee benefit expenses (15.1) (13.4) (31.4) – (59.9)Other expenses (46.5) (33.5) (18.7) – (98.7)

Intersegment expenses (6.8) (5.0) (0.8) 12.6 –Segment operating expenses (347.4) (255.9) (141.8) 12.6 (732.5)Segment EBITDA 428.8 34.4 131.8 – 595.0Depreciation and amortisation (115.0) (20.7) (76.2) – (211.9)Segment profit/(loss) 313.8 13.7 55.6 – 383.1

Segment capital expenditure 245.8 17.1 93.7 – 356.6

During the year, the Technology segment delivered technology related network projects for Regulated Networks at a margin of $0.7m. The assets are included in the segment capital expenditure for Regulated Networks. The $0.7m margin is included in the segment information presented for Technology and has been eliminated in the reconciliation below.

Reconciliation to revenue, profit/(loss) before income tax and capital expenditure reported in the financial statements:30 JUN 2018

REVENUE $M

PROFIT/(LOSS) BEFORE

INCOME TAX$M

CAPITAL EXPENDITURE

$M

Reported in segment information 1,327.5 383.1 356.6Amounts not allocated to segments (corporate activities):Revenue 0.9 0.9 –Employee benefit expenses – (28.6) –Other operating expenses – (25.0) –Elimination of margin on inter–segment transaction – (0.7) –Depreciation and amortisation – (14.0) –Interest costs (net) – (130.7) –Fair value change on financial instruments – 3.1 –Associates (share of net profit/(loss)) – (1.5) –Capital expenditure – – 24.6Reported in the financial statements 1,328.4 186.6 381.2

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5. CAPITAL COMMITMENTS

31 DEC 2018

$M31 DEC 2017

$M30 JUN 2018

$M

Capital expenditure committed to but not provided for at balance date 70.8 75.1 68.0

6. BORROWINGS AND DERIVATIVESNET

DERIVATIVES$M

BORROWINGS$M

Balance at 30 June 2018 (60.4) (2,395.3)Fair value movements:

Foreign exchange rates 2.1 (2.2)Interest rates and other fair value changes 9.6 (11.8)

Drawdown – (70.0)Amortised costs – (0.5)Balance at 31 December 2018 (48.7) (2,479.8)Fair value at 31 December 2018 (48.7) (2,626.9)

7. FINANCIAL RATIOS31 DEC 2018

6 MONTHS$M

31 DEC 20176 MONTHS

$M

30 JUN 201812 MONTHS

$M

Earnings per share Net profit attributable to owners of the parent 82.6 78.3 148.2Weighted average ordinary shares outstanding during the period (number of shares) 999,911,394 996,852,041 998,370,185

8.3 cents 7.9 cents 14.8 centsNet tangible assets per shareNet assets attributable to owners of the parent 2,433.5 2,450.3 2,440.4Less total intangible assets (1,408.4) (1,399.8) (1,398.2)Total net tangible assets 1,025.1 1,050.5 1,042.2Ordinary shares outstanding (number of shares) 999,867,208 999,913,110 999,913,852

102.5 cents 105.1 cents 104.2 cents

31 DEC 2018$M

31 DEC 2017$M

30 JUN 2018$M

Economic net debt to economic net debt plus adjusted equity ratio (“gearing ratio”) Face value of borrowings 2,475.8 2,270.8 2,405.7Less cash and cash equivalents (26.5) (17.9) (27.9)Economic net debt 2,449.3 2,252.9 2,377.8Total equity 2,451.1 2,468.1 2,457.9Adjusted for hedge reserves 41.6 44.8 40.1Adjusted equity 2,492.7 2,512.9 2,498.0Economic net debt plus adjusted equity 4,942.0 4,765.8 4,875.8

49.6% 47.3% 48.8%

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8. CASH FLOWS

31 DEC 20186 MONTHS

$M

31 DEC 20176 MONTHS

$M

30 JUN 201812 MONTHS

$M

Reconciliation of net profit/(loss) to net cash flows from/(used in) operating activitiesNet profit/(loss) for the period 83.3 79.0 149.8Items classified as investing activitiesNon-cash items classified as investing activities (2.5) 3.1 12.2Other items classified as investing activities 0.2 – –Net loss/(gain) on sale of investments – (1.1) (1.1)

(2.3) 2.0 11.1Items classified as financing activitiesItems associated with lease liabilities 1.5 – –Non-cash itemsDepreciation and amortisation 119.9 109.6 225.9Non-cash portion of interest costs (net) (1.4) (1.5) 1.7Fair value change on financial instruments 0.2 (2.8) (3.1)Associates (share of net (profit)/loss) (0.5) 0.1 1.5Increase/(decrease) in deferred tax 11.7 11.8 8.6Increase/(decrease) in provisions (11.3) 1.0 21.4Other non-cash items (1.3) – 0.4

117.3 118.2 256.4Changes in assets and liabilitiesTrade and other payables (3.0) 15.6 1.0Contract liabilities (2.9) 10.3 12.6Inventories 0.9 (1.6) (1.2)Trade and other receivables 5.3 (5.8) (6.6)Income tax 19.0 18.3 (33.2) 19.3 36.8 (27.4)Net cash flows from/(used in) operating activities 219.1 236.0 389.9

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9. LEASES

9.1 Right of use assets

LAND, BUILDINGS AND IMPROVEMENTS

$M

OTHER PLANT AND EQUIPMENT

$MTOTAL

$M

Opening net book value 1 July 2018 – – –Movements on transition 39.4 0.7 40.1Additions 0.8 1.5 2.3Depreciation for the period (3.2) (0.3) (3.5)Carrying amount 31 December 2018 37.0 1.9 38.9Cost 40.2 2.2 42.4Accumulated depreciation (3.2) (0.3) (3.5)

9.2 Lease liabilities maturity analysis

MINIMUM LEASE PAYMENTS

$MINTEREST

$M

PRESENT VALUE

$M

Within one year 8.4 (1.8) 6.6One to five years 23.0 (4.8) 18.2Beyond five years 21.4 (6.0) 15.4Total 52.8 (12.6) 40.2

Current portion 8.9Non-current portion 31.3Total 40.2

9.3 Lease expenses included in profit or loss

31 DEC 2018 6 MONTHS

$M

Short-term leases 0.3Interest on leases 1.0

9.4 Lease cashflows included in cashflow statement

31 DEC 2018 6 MONTHS

$M

Total cash outflow in relation to leases 4.6

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9. LEASES (continued)

9.5 Transition to NZ IFRS 16

01 JUL 2018 $M

Operating lease commitment at 30 June 2018 as disclosed in the Group’s financial statements 40.2Discounted using the incremental borrowing rate at 1 July 2018 30.2Finance lease liabilities as at 1 July 2018 0.5Recognition exemption for:Short-term leases (0.5)Extension options reasonably certain to be exercised 13.0Net changes in leases (2.3)Lease liabilities recognised at 1 July 2018 40.9

Transition The group applied NZ IFRS 16 from 1 July 2018 using the modified retrospective approach.

Leases entered into and identified by the group include property leases, building access rights, and vehicle leases.

In assessing whether an arrangement is, or contains a lease, the group considers whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the group assesses whether:

• The contract involves the use of an identified asset;• The group has the right to obtain substantially all of the economic

benefits from use of the asset throughout the period of use; and• The group has the right to direct the use of the asset.

On transition, the group applied the practical expedient to not recognise right-of-use assets and liabilities for short-term leases with lease terms ending within 12 months. The costs related to these leases are recognised in the profit or loss.

Policies Lease liabilities are measured at the present value of remaining lease payments, discounted at the group’s incremental borrowing rate as at 1 July 2018. The weighted-average rate applied is 4.55%.

Right of use (ROU) assets are initially recognised at cost, comprising the initial amount of the lease liability less any unamortised lease incentives. ROU assets are subsequently depreciated using the straight-line method from the commencement date to the end of the lease term. In considering the lease term, the group applies judgment in determining whether it is reasonably certain that an extension or termination option will be exercised. The majority of the group’s leases are property leases. These, in the main, give the group the right to renew the leases at the end of their lease terms.

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10. RELATED PARTY TRANSACTIONS

Majority shareholder dividend

Vector Limited has paid its majority shareholder, Entrust, dividends of $60.1 million during the period (six months ended December 2017: $60.1 million, 12 months ended 30 June 2018: $122.0 million).

Outstanding balances

At 31 December 2018, the group has no material outstanding balances due to or from related parties of the group (31 December 2017 and 30 June 2018: not material).

11. CONTINGENT LIABILITIES

Disclosures The directors are aware of claims that have been made against entities of the group and, where appropriate, have recognised provisions for these within the financial statements.

No material contingent liabilities have been identified.

12. EVENTS AFTER THE END OF THE PERIOD

Repayment of borrowings

On 14 January 2019, the group repaid $285.6 million (GBP 115.0 million) of medium term notes using existing facilities.

Interim dividend On 25 February 2019, the board declared an interim dividend for the year ended 30 June 2019 of 8.25 cents per share.

No adjustment is required to these interim financial statements in respect of this event.

Financial statements approval

The interim financial statements were approved by the board of directors on 25 February 2019.

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BOARD OF DIRECTORS AND MANAGEMENT TEAM

BOARD OF DIRECTORSDame Alison Paterson // ChairJonathan Mason // Deputy ChairKaren SherryBob ThomsonMike Buczkowski

MANAGEMENT TEAMSimon Mackenzie // Group Chief ExecutiveDan Molloy // Chief Financial OfficerAndre Botha // Chief Networks OfficerKate Beddoe // Chief Risk Officer Nikhil Ravishankar // Chief Digital Officer

ASSOCIATES AND JOINT VENTURES PRINCIPAL ACTIVITY PROPORTION HELD

31 DEC 2018 31 DEC 2017 30 JUN 2018

Associates Tree Scape Limited Vegetation management 50% 50% 50%

Joint VentureKapuni Energy Joint Venture Cogeneration 50% 50% 50%

FINANCIAL CALENDAR 2019Record date for the interim dividend 29 March Interim dividend paid 11 April Third quarter operational statistics AprilFourth quarter operational statistics JulyFull year result and annual report AugustAnnual General Meeting September* Dividends are subject to board determination

INVESTOR INFORMATION

20

19 //

Ordinary shares in Vector Limited are listed and quoted on the New Zealand Stock Market (NZSX) under the company code VCT. Vector also has capital bonds listed and quoted on the New Zealand Debt Market (NZDX).

Current information about Vector’s trading performance for its shares and bonds can be obtained on the NZX website at www.nzx.com. Further information about Vector is available on our website at www.vector.co.nz

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DIRECTORY

REGISTERED OFFICEVector Limited101 Carlton Gore RoadNewmarketAuckland 1023New Zealand

Telephone 64-9-978 7788Facsimile 64-9-978 7799www.vector.co.nz

POSTAL ADDRESSPO Box 99882NewmarketAuckland 1149New Zealand

INVESTOR ENQUIRIESTelephone 64-9-213 5179Email: [email protected]

SHARE REGISTRAR Computershare Investor Services Limited Level 2, 159 Hurstmere Road Takapuna Private Bag 92119 Auckland 1142 New Zealand Telephone 64-9-488 8777

THE FASTEST AND EASIEST WAY TO REPORT AN OUTAGE AND GET UPDATES IS NOW ONLINE, AT VECTOR.CO.NZ/OUTAGES OR YOU CAN CALL 0508 VECTOR (0508 832 867)

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VECTOR.CO.NZ